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Secured Transactions - Coggle Diagram
Secured Transactions
Step 1: Classify Collateral (First two steps deal with whether the creditor has actually created a security interest. If the creditor has not created a security interest, it is at the end of the line when collateral is sold. Creditors always want to be secured and want to be first in line)
Intangibles - negotiable instruments, investment property, deposit accounts,
Chattel paper - written record evidences both a monetary obligation to pay and a security interest in goods, but does not include records that evidence a right to payment
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Business use
Farm products - crops, livestock, supplies used in a farming operation, etc.
Equipment - goods used primarily in a business that are not inventory, farm products, or consumer goods, such as machinery or office equipment
Inventory - goods held for sale, includes raw materials
Consumer goods - goods that are used primarily for personal, family, or household purposes
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A creditor can include property the debtor has yet to own if it includes an after-acquired property clause in a security agreement
Step 2: Attachment (Attaching a security interest to collateral gives the creditor rights against the debtor on that collateral. Every essay requires an attachment analysis, including essays dealing with only default issues. Without it, no security interest is created)
CAP: A creditor can create a security interest by having control of an intangible, by having an authenticated security agreement creating the security interest, or by taking possession of the collateral
But the security interest just created is worthless if it is not affixed to a specific collateral. To affix the security interest to the collateral, the debtor must also have had rights in the collateral and the creditor must have given value. If the security interest never attaches to the collateral, then the creditor remains unsecured and the creditor cannot claim that specific property to sell
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Step 3: Perfection (Once the security interest has attached to the collateral, the secured creditor must tell the rest of the world that it has a security interest in this specific collateral to claim priority over other creditors. This notice is called perfection. The security interest must be perfected in the specific collateral
Methods of perfection (not all five types apply to all types of collateral). If not perfected, then you are an unsecured party
Temporary
Not all PMSIs have automatic perfection. If the PMSI purchase is collateral other than consumer goods, the security interest is temporarily perfected for 20 days.
If the non-consumer goods creditor files a financing statement within the 20 days, its priority relates back and continues. If the non-consumer goods creditor perfects over 20 days, it loses its PMSI status, although it is still a perfected secured creditor. If the non-consumer goods creditor does not perfect, it is an unperfected secured creditor
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Automatic
Arises with a special kind of security interest called a Purchase Money Security Interest (PMSI) (common essay issue)
A PMSI is created where the seller sells goods to a buyer on credit OR the lender lends the purchaser money to buy specific goods
The security interest is given special status because the lender or seller has directly given value for a particular purchase. PMSI creditors who properly perfect are given priority over all other perfected creditors - a super priority
If the PMSI is for the purchase of consumer goods, perfection is automatic. The creditor does not need to do anything except for two situations: (1) For anything that requires a title where the security interest must be noted on the title, such as cars, motorcycles, and boats; and (2) for fixtures that require filling in the Recorder of Deeds office
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File financing statement (Most common to file this with the Secretary of State's office where the collateral is located. This gives actual notice to those who look at the financing statement and constructive notice to all others)
Step 4: Priority (Once you have identified each creditor as a perfected secured creditor, an unperfected secured creditor, or an unsecured creditor, you need to apply the correct priority rule to the conflicting interests. Be sure to keep track of the dates each event occurs)
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Buyers
The general rule is that a secured interest stays attached to the collateral despite a sale to a buyer. There are three primary exceptions: (1) when the creditor consents; (2) when the buyer is in the ordinary course of business (BIOC); and (3) when a buyer purchases a consumer good from another consumer (garage sale or consumer-to-consumer exception)
A buyer in the ordinary course of business (BIOC) purchases the goods from a seller who sells goods as part of its regular business. The BIOC takes the goods free of the secured interest the seller's creditor has created.
A buyer of consumer goods purchases consumer goods from a consumer who had purchased those goods on credit from a creditor who has an automatically perfected PMSI. That buyer of consumer goods takes free of the creditor's PMSI security interest. If however, the creditor does file a financing statement, then the security interest remains attached. Why? Because the buyer would have had constructive notice of the creditor's interest
Car purchase from car dealer = BIOC (but if purchased on credit, buyer has given its creditor its own security interest)
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Car purchase from neighbor = Not BIOC (unless neighbor is in car-selling business), but possible buyer of consumer goods
Garage sale purchase = Not BIOC, but possible buyer of consumer goods
Lien Creditors
A lien creditor is not a secured creditor. The lien creditor acquires a lien on the collateral through a court judgment. If the lien creditor has levied on the collateral before a security interest is perfected, then the lien creditor has priority except for a PMSI creditor
Most essays stop here (step 4). The call of the question ends with who has priority. A few questions will include what happens after priority is determined. Other questions will have their entire focus be on what happens on default (see step 5)
Step 5: Default
Default is defined by the security agreement between the parties. Thus, whether a default has occurred will be given to you. Upon default, the creditor can take two steps:
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One of the most important rights of a debtor arises here. After a default, the debtor has a right to redeem the debt. The debtor must pay the entire debt plus attorney fees and costs. It is then entitled to keep the collateral
Critically important for home mortgages. The debtor can keep their home by refinancing with a different creditor. It's usually at a higher interest rate, but they keep their house
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Following the sale, the proceeds are distributed in a set order. If the sale proceeds don't cover the debt and costs, the debtor is still liable for the remainder - a deficiency judgment. If the creditor does not follow the proper procedure after default, it may forfeit the right to receive a deficiency judgment. The distribution order is:
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Definition: A secured transaction is created when a debtor seeks a loan and the entity giving the loan takes a special property interest - a security interest - in a specific piece of the debtor's property - the collateral - to insure payment of the loan
Debtors have few rights under Article 9. In an ST question, debtors don't always pay their debts. Occasionally an issue that relates to the debtor's interests arises when the sale of the collateral does not follow UCC requirements. When you see only one creditor, think default
For the most part, issues on ST essay questions relate to which creditor has priority over the collateral to sell it and apply the proceeds to its loan. Thus, the issues center on the creation of the secured interest and how a creditor has priority over other creditors
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Future Advance Clause
A future advance clause refers to events that happen after the initial security agreement. Here, the creditor lends additional money and the original security interest secures the loan
The second loan is covered only if the original security agreement includes a future advances clause. Look for it when the debtor gets additional money from the same creditor
The same tricky circumstances arise as with after-acquired property - a second creditor jumps in and lends money to the debtor. If the first creditor did not include a future advance clause, then it must get a new security agreement from the debtor. This security agreement usually relates back to the original filing
Proceeds
Proceeds occur when the debtor sells the original collateral. Whatever the debtor receives from the sale is proceeds, including cash, negotiable instruments, and chattel paper.
Proceeds are temporarily perfected for 20 days. That perfection continues if the proceeds are identifiable cash proceeds or the financing statement for the proceeds would be filed in the same office as original collateral. If it's in a different office, then another filing (or possession must occur)
Two different types of proceeds: (1) monies received when the collateral is sold upon default; (2) what is received when the debtor sells the collateral before default